Rs.17,000 crore released into banking system; retail interest rates expected to fall
The Reserve Bank of India (RBI) Monday kept key interest rates unchanged, but cut the cash reserve ratio (CRR) releasing Rs.17,000 crore into the banking system ahead of the festive season, sparking talk of home and auto loans rates coming down.
The CRR, the proportion of money banks are required to keep with the central bank, is reduced by 0.25 percent (or 25 basis points) to 4.50 percent. The new CRR rate will be effective from the fortnight Sep 22, 2012.
The CRR cut will release Rs.17,000 crore liquidity into the economy, the central bank said in the mid-quarter review of the monetary policy.
The central bank, however, kept interest rates unchanged saying inflation remained a big concern.
It kept the repo rate, the rate at which it lends to commercial banks, unchanged at 8 percent. The reverse repo rate, the rate at which the apex bank borrows money from commercial banks, was also left intact at 7 percent.
In the policy review, the RBI said the main focus of monetary policy remains fighting inflation.
"As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations," said RBI Governor D Subbarao.
"Containing inflationary pressures and lowering inflation expectations warrant maintaining the momentum of recent policy actions to step up investment, alleviate supply constraints, and improve productivity."
In its policy review, the RBI pointed out that inflation has remained sticky at around 7.5 percent throughout the current financial year so far.
India's core inflation, based on wholesale prices, soared to 7.55 percent in August as compared to 6.87 percent in the previous month. The RBI considers 4-5 percent inflation level comfortable.
Welcoming the RBI decision, Finance Minister P. Chidambaram said the government would take further steps in the next one and half month to bring more fiscal discipline.
"I am very confident that between now and Oct 30 since the government is expected to take a number of additional policy measures and also lay out the path of fiscal correction, the response of RBI on Oct 30 will be far more supportive of growth," Chidambaram told reporters.
The RBI is scheduled to announce the next policy review Oct 30, 2012.
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the RBI's decision to cut CRR was a "step in the right direction."
The Chairman of the Prime Minister's Economic Advisory Council C. Rangarajan said the RBI has done the best it would have done under the current circumstances.
He said the reduction in the CRR will help in improving the liquidity and enable the banks to provide a larger amount of credit.
Analysts said the move is primarily aimed at managing the tight liquidity expected in the next few weeks during the festive season and ensuring smooth flow of credit to productive sectors of the economy.
SBI Chairman Pratip Choudhury, who has been asking for doing away with CRR, welcomed the RBI move.
"We would like to make more cuts in the manufacturing, SME and industrial segment because that is where the demand has not been stimulated. In our consumer segment, home loan and car loan, prices are already the lowest. So, let us see," he told a news channel when asked how much he thought the rates might come down now, given the CRR cut.
Others hinted at interest rates coming down as most banks have cut their deposit rates.
India Inc also welcomed the CRR cut.
"Additional liquidity in the system would help the current situation, where availability and cost of credit have been a challenge, particularly for the SMEs," said Chandrajit Banerjee, director general, Confederation of Indian Industry (CII).
Federation of Indian Chambers of Commerce and Industry (FICCI) President R. V. Kanoria said: "We hope that the RBI continues with this stance and we look forward to a rate cut and repo rate cut in RBI's second quarter review of monetary policy next month."
At the equities markets, rate sensitive scrips like realty, auto and banks were the top sectoral performers.